Small Cap Value Report (Wed 11 Jan 2023) - COG, W7L, NICL, HSW, RCH, SCE, ABDP, SBRY, BOO, FRAS, DLG, ADM, TEG, LOOK

11th Jan '23 by Paul Scott

74 comments 10299 reads

Good morning from Paul & Graham!

Today's report is now finished. Lots more to cover, but I've run out of time & energy!

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda

Absolutely loads of updates today, plus some backlog items. So we'll focus mainly on short sections, covering as many companies as we can.

Paul's Section:

Cambridge Cognition Holdings (LON:COG) [quick comment] (I hold) - in line with market expectations trading update. Interesting acquisition of Winterlight Labs for £7m (£3m cash, £4m shares with 6m lock-in, c.10% dilution). Acquisition seems to be loss-making, but with exciting-sounding potential - it talks of “major growth”from specialism in speech-based digital biomarkers. Strong order book. Cross-selling opportunities. Sounds interesting, but does this mean the enlarged group will become loss-making again? Does that matter? Will be interesting to see how a market that’s turning more bullish sees this. It could add some spice to the way COG is perceived, if bullish conditions develop further maybe?

Warpaint London (LON:W7L) - another positive trading update, ahead of expectations, from this makeup company that has been on a roll for some time. I work out the valuation (in the absence of broker notes) and think it looks bang in the middle of what seems reasonable. Update - a note from Shore Capital has just come through! Therefore despite a strong run up in share price recently, I think the fundamentals justify & back up…

Unlock with Email

Unlock with Google

Already have an account?
Login here

laurie

11th Jan '23

Nightcap (LON:NGHT) This might help you decide: https://shareprophets.com/EPIC...

The site needs a subscription but you can read the headlines of the articles.

disclosure: I've never owned this. [I read bits of the Admission Document.]

The Jayman

Thanks Berksbee.

You're right to call out the upsides and the extent to which the downsides are removed (e.g. peace settlement in Ukraine instead of anxiety about escalation, inflation actually falling consistently and faster than expected) then these might be powerful drivers.

1H, 23 will be interesting.

Effortless Cool

I think there will very definitely be a read across to other motor insurers, and Direct Line is better than average in the sector.

As to longer duration or illiquid assets, these are often very reasonable investments for motor insurers.

First, they will have a material amount of long duration liabilities relating to third party bodily injury losses, for which individual claim reserves can be over £10m. Much of this will be reinsured out, but Direct Line Insurance (LON:DLG) carries a fairly large retention that they have increased since 2021.

Second, motor insurer cash flows are not volatile, with a reliable cash inflow from premiums and a fairly stable cash outflow on accidental damage claims. It is safe to put, say, 10% of the portfolio in illiquid assets, comfortable in the knowledge that cash flows are never likely to be such that these assets need to be realised unexpectedly.

Michael C

Silver Moon - May I ask why you never contemplated Direct Line? Obviously that company under its current management must be close to uninvestable but I wasn't aware they were as bad as they have turned out to be.

I did hold Sabre Insurance (LON:SBRE) but have sold today after reading the Direct Line update and re-reading Sabre's updates from July 22 (when the share price collapsed) and October.

djack

My partner and I live in different parts of the South-east England and I was keeping an eye on footfall just before and after Christmas and it does feel like there's a split occurring within the consumer base. It appears to me that, despite talk of recession and cost of living crisis, there are groups of shoppers that are still able to splash out and appear comfortable with their spending.

Her son and his girlfriend both work in clothes shops selling clothes with high price points and they both reported back that they were very busy both, before and after Christmas.

The Debenhams website is still a very poor shopping experience. I fully expected Boohoo to apply their digital expertise and improve the site when they bought it.

The Direct Line Insurance (LON:DLG) RNS highlights a point I have made previously. I occasionally see comments that companies have strong balance sheets which are underpinned by freehold properties. Direct Line say, '..our investment property portfolio has experienced a c.15% reduction in values, equivalent to £45 million.' What worries me is that a lot of companies will find that freehold properties are worth less each year, particularly those like car showrooms and large pubs because of continuously increasing energy efficiency targets. The government has proposed an interim target of a C rating by April 2027 but a bigger risk is that it pushes ahead with a requirement for B by 2030 - only 7 years away and an impossible target for a huge part of the UK's commercial property estate. 7 years may seem a long time but if the B target becomes a reality valuers will start discounting it straight away.

https://assets.publishing.serv...

Asset-Stripper

Someone bought a chunk (4.1M shares)
Be interesting to see if Ennismore short position decreases.

Snazzytime

Thanks for that link Laurie.

I see you have subscribed to shareprophets. What's the service like? Seems like it might be mostly about negative commentary / shorting from my brief (and ill informed) look.

Appreciate any feedback from you (or any other subscribers to the service.

Snazzy

ridavies

Re Howard and Nathan, access easy enough through the LSE website.

Kouremenous

Hi Asset-Stripper,

The "£80m profit" quoted on the update is actually underlying operating profit, not profit after tax, so I'm afraid the PER is likely to be closer to 10.

Hope that helps

Boon

Maybe Boohoo (LON:BOO) oversold their tech prowess?

To be honest THG (LON:THG) shouod be the ones buying up failed brands, given they have ecommerce-as-a-service in their Ingenuity unit.

BnB

Cambridge Cognition Holdings (LON:COG) - I really don’t like this acquisition. I could complain that the addition of another loss-maker to the portfolio clouds the financial picture and delays the achievement of positive earnings by another couple of years. But what really pisses me off is the thought that a business earning a paltry £10m in revenues feels the need to spend another £7m to take that number to £11m. And acquire 28 staff generating less than £40k each per employee at a loss of £75k per head.

Just sell some more of your own flipping tests! Or are we finding out that COG has already exhausted the TAM for its in-house capabilities?

Of course I know even less about cognitive assessments than I do about value investing so it could be a masterstroke - but I perceive better risk/reward, and far more liquidity, elsewhere in the life sciences field.

Rusty2

"* SIG PLC - SEES FY22 UNDERLYING OPERATING PROFIT TO C£80M,
UP
FROM £41.4M REPORTED IN 2021."

So 2021 £41m U. Op. Profit turned into a net £28m loss.

Are they even making a profit?

Debts are very high.

tic_tac_toe

i made the point of speaking to a few retailer cashiers in the run up to and through christmas, asking if people were cutting back, in a few cases I was told they wre 'seeing a lot of credit cards being used' people seem to have put this year onto debt, and I did anticipate a decent christmas reporting, and Marks and Spencer (LON:MKS) are updating imminently too

Yes - helpful thx. I saw the broker adjusted EPS 3.148p so a fraction over 10 x.
Interested to see if short position closed.

shomer2

12th Jan '23

this make more concerned , refund will be given only 21 days after return

https://www.thesun.co.uk/money...

mojomogoz

THG (LON:THG) 's Ingenuity is merely a repackaging of internal IT and slapping a label as independent business unit with high margin growth potential...I might be wrong and maybe it makes it to be what they claim...but on looking into company soon after ipo that was my conclusion...a way to pump up the valuation

SaarfLondon

14th Jan '23

Oh no.Hate it when one of my stocks start appearing as tips . Last ex divi is now almost a freebie

AstonGirl

15th Jan '23

Warpaint London (LON:W7L) I’m circling back to this week’s results so apologies for being tardy

I was happy with this weeks TU & in particular the mention of sales growth in the US as this looks to be a key growth opportunity for them

Their US based NED resigned earlier this month so hopefully they’ll soon announce a new suitably experienced one & given their Board is currently 100% male I rather hope it’s a woman (it is a make up company after all & as a female investor I do like to see women on the Board of companies I’m a shareholder in)
Great to see that Paul is shortly to record an interview with Sam too- I shall look forward to that

Small Cap Value Report (Wed 11 Jan 2023) - COG, W7L, NICL, HSW, RCH, SCE, ABDP, SBRY, BOO, FRAS, DLG, ADM, TEG, LOOK

Agenda

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

74 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...